The industry must give priority to curbing abusive lending practices that have devastated the housing market and wreaked havoc on the securities market, Federal Reserve Board Governor Randall Krozner said in a keynote speech at last week's ASF 2008 conference held in Vegas.
While the housing crisis has many causes, Kozner said that deceptive lending has proven to be of particular concern. The fallout from the subprime bust has been stark: As of November, roughly 20% of subprime ARMs were 90 or more days delinquent, twice the level of the previous year. More than 171,000 foreclosures were started on these mortgages, up 36% from the previous quarter, Kozner said.
"Protecting borrowers with responsible underwriting standards also protects the integrity and proper functioning of the mortgage market by increasing investor confidence," he said.
Protection, for both borrowers and investors, was a running theme throughout the four-day conference. Increased transparency and due diligence will certainly help, most attendees agreed, but there also seemed to be an acknowledgment that some form of regulation and oversight will likely be needed to discipline the mortgage market.
The Federal Reserve's proposal for stricter regulations in the mortgage market is carried out through the Home Ownership and Equity Protection Act, Kozner noted. The tighter regulations are intended to protect consumers from "excessive layering of risk even as the practices that increase risk may change," he said. Kozner added that the intention of the regulations is to focus on protections where the risks are greatest and to preserve consumers' access to responsible credit.
The proposed reforms are specifically aimed at the Truth in Lending regulation, which would then be adopted under the HOEPA. The reform, proposed in December, covers four key points: creditors would be prohibited from extending credit without considering a borrowers ability to pay; creditors would be required to verify the income and assets they rely upon in making a loan; no prepayment penalties would be permitted for at least 60 days and creditors would have to establish escrow accounts for taxes and insurance.
The Fed's proposed reforms would apply stricter regulations to higher-priced loans, including the entire subprime and Alt-A markets. But the Fed's public hearings and analysis identified problems not just in higher-priced loans, but also the broader mortgage market, Kozner said. The agency has thus targeted broker steering, appraisal coercion, unwarranted servicing fees and deceptive advertising.
Alex Pollock, resident fellow at the American Enterprise Institute, advocated for a one-page, streamlined disclosure for borrowers that clearly spells out the provisions of their loans. This would serve as a solution to a major problem that many in the mortgage industry have acknowledged: the loans that are given to borrowers are too arduous to read and understand. These remarks were made at the general session on legislation, regulation and market oversight.
Kozner also emphasized the need to prevent the continuing wave of foreclosures from growing across the country. He credited the efforts of the ASF and HOPE NOW Alliance for developing a systematic approach to loan modifications.
"It would be very unfortunate if some of these borrowers faced foreclosure when their payments increased merely because servicers lacked the capacity to reach them in time with a sustainable alternative," Kozner said.
The conference was held in Las Vegas with a total of 6,500 registered attendees, according to ASF officials.
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